Tag Archives: estate planning

Opportunities and Challenges: Valuation in the Age of COVID-19

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  • the value of your assets

Valuation and estate planning go hand in hand. After all, the tax implications of various estate planning strategies depend on the value of your assets at the time they’re transferred.

The COVID-19 pandemic has had a significant impact on the value of many business interests and other assets, which may create some attractive estate planning opportunities. It also presents unique challenges for valuation professionals. As a result, it’s more important than ever to involve experienced valuation experts in the estate planning process.

What are the opportunities?

With the value of many assets depressed (in many or most cases temporarily), now may be an ideal time to gift them, either directly to family members or to irrevocable trusts and other estate planning vehicles. Transferring assets while values are low also allows you to use as little of your gift and estate tax exemption as possible, maximizing the amount available for future gifts or bequests. As the economy fully recovers and assuming your asset values rebound, your beneficiaries should enjoy substantial growth outside your taxable estate.

What are the challenges?

The pandemic has created a situation that’s truly uncharted territory for the valuation profession. Unlike other economic crises in recent years, most of the damage to the economy resulted from business closures and restrictions and other measures designed to help contain the virus.

For business valuations, the current environment presents several challenges, including:

Known or knowable. A fair market valuation generally doesn’t consider “subsequent events” — that is, events that occur after, and weren’t “known or knowable” on the valuation date. Experts generally agree that the COVID-19 pandemic wasn’t known or knowable as of December 31, 2019. Yet for valuation dates after that, determining whether the pandemic was known or knowable and should be considered in valuing a business or other asset can be a formidable task.

Valuation approaches. Generally, valuators consider all three of the major valuation approaches: the income, market and asset approaches. The pandemic may affect the relative appropriateness of each approach and the amount of weight they should be assigned.

For example, market-based methods, which rely on data about actual transactions involving comparable businesses, may be less relevant today if the underlying transactions predate COVID-19 (although it may be possible to adjust to reflect the pandemic’s impact).

Many valuators are emphasizing income-based methods, such as the discounted cash flow (DCF) method, which involves projecting a business’s future cash flows over a defined period (such as five years) and discounting them to present value. The advantage of DCF is that it provides a great deal of flexibility to model a business’s expected financial performance based on current conditions as well as assumptions about its eventual return to “normal” over the next several years.

Regardless of the method or methods used, it’s important for valuators to consider a business’s available cash and expected cash needs to assess its viability as a going concern. These considerations will be critical in evaluating a business’s risk and the impact of that risk on value.

What’s it worth?

Depressed asset values can create attractive estate planning opportunities. While the pandemic has dropped the value of some assets, others haven’t been affected or have even increased in value. Contact us with questions regarding the valuation of your assets.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

Don’t Choose Your Executor Too Hastily

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Haste makes waste. Or, in the case of estate planning, it can lead to other problems and, possibly, financial loss. Notably, if you don’t take enough time to choose the best executor for your estate, this “wrong call” can cost your family.

Many responsibilities

You may think that there’s not much to the job, but an executor’s responsibilities are extensive. As your personal representative, he or she will be entrusted with several significant duties, including collecting, protecting and taking inventory of your estate’s assets; filing the estate’s tax return and paying its taxes; handling creditors’ claims and the estate’s claims against others; making investment decisions; distributing property to beneficiaries; and liquidating assets, if necessary.

Whom should you choose as executor? Usually, it comes down to a decision between a family member or close friend and a professional.

Your first thought might be to choose a family member or a trusted friend. But this may be a mistake for one of these reasons:

  • The person may be too grief-stricken to function effectively,
  • If the executor stands to gain from the will, there may be a conflict of interest — real or perceived — which can lead to will contests or other disputes by disgruntled family members,
  • The executor may lack the financial acumen needed for the position,
  • The executor may hire any necessary professionals, but they might not be the professionals you’d hire.

To avoid these risks, you might instead consider choosing an independent professional as executor, particularly if the professional is familiar with your financial affairs.

Form a team of executors

Finally, it’s common to appoint co-executors — one person who knows the family and understands its dynamics and an independent executor with the requisite expertise. Whether you decide to use co-executors or only one, be sure to designate at least one backup to serve in the event that your first choice is unable to do so. Contact us with questions about choosing an executor.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

The Tax Score of Winning

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tax score of winning

Studies have found that more people are engaging in online gambling and sports betting since the pandemic began. And there are still more traditional ways to gamble and play the lottery. If you’re lucky enough to win, be aware that tax consequences go along with your good fortune.

Review the tax rules

Whether you win online or at a casino, a bingo hall, a fantasy sports event, or elsewhere, you must report 100% of your winnings as taxable income. They’re reported on the “Other income” line of your 1040 tax return. To measure your winnings on a particular wager, use the net gain. For example, if a $30 bet at the racetrack turns into a $110 win, you’ve won $80, not $110.

You must separately keep track of losses. They’re deductible, but only as itemized deductions. Therefore, if you don’t itemize and take the standard deduction, you can’t deduct gambling losses. In addition, gambling losses are only deductible up to the amount of gambling winnings. Therefore, you can use losses to “wipe out” gambling income but you can’t show a gambling tax loss.

Maintain good records of your losses during the year. Keep a diary in which you indicate the date, place, amount, and type of loss, as well as the names of anyone who was with you. Save all documentation, such as checks or credit slips.

Hitting a lottery jackpot

The odds of winning the lottery are slim. But if you don’t follow the tax rules after winning, the chances of hearing from the IRS are much higher.

Lottery winnings are taxable. This is the case for cash prizes and for the fair market value of any noncash prizes, such as a car or vacation. Depending on your other income and the amount of your winnings, your federal tax rate may be as high as 37%. You may also be subject to state income tax.

You report lottery winnings as income in the year, or years, you actually receive them. In the case of noncash prizes, this would be the year the prize is received. With cash, if you take the winnings in annual installments, you only report each year’s installment as income for that year.

If you win more than $5,000 in the lottery or certain types of gambling, 24 % must be withheld for federal tax purposes. You’ll receive a Form W-2G from the payer showing the amount paid to you and the federal tax withheld. (The payer also sends this information to the IRS.) If state tax withholding is withheld, that amount may also be shown on Form W-2G.

Since the federal tax rate can currently be up to 37%, which is well above the 24% withheld, the withholding may not be enough to cover your federal tax bill. Therefore, you may have to make estimated tax payments — and you may be assessed a penalty if you fail to do so. In addition, you may be required to make state and local estimated tax payments.

Talk with us

If you’re fortunate enough to win a sizable amount of money, there are other issues to consider, including estate planning. This article only covers the basic tax rules. Different rules apply to people who qualify as professional gamblers. Contact us with questions. We can help you minimize taxes and stay in compliance with all requirements.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

3 Essential Estate Planning Strategies to Consider

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essential estate planning strategies

With most tax planning, there are certain strategies that are generally effective and shouldn’t be ignored. The same holds true for estate planning. Here are three essential estate planning strategies to consider that may help you achieve your goals.

Use an ILIT to Hold Life Insurance

Do you own an insurance policy on your life? Then be aware that a substantial portion of the proceeds could be lost to estate taxes if your estate is large enough to be liable for them. The exact amount will depend on the estate tax exemption available at your death as well as the estate tax rates that apply.

However, if you don’t own the policy, the proceeds won’t be included in your taxable estate. One effective strategy for keeping life insurance out of your estate is to set up an irrevocable life insurance trust (ILIT) to buy and hold the policy.

If you already own your life insurance policy, you can transfer the policy to an ILIT. But watch out for the “three-year rule,” which provides that certain assets, including life insurance, transferred within three years of your death are pulled back into your estate and potentially taxed.

Place Assets in a Credit Shelter Trust

Designating your spouse as your sole beneficiary may seem like a good strategy. But doing so can waste your estate tax exemption.

Suppose you leave everything to your spouse. There will be no current estate tax at your death because of the unlimited marital deduction (assuming your spouse is a U.S. citizen). When your spouse dies, however, the assets transferred to him or her at your death will be included in his or her taxable estate (assuming the assets remain intact). A portion of your spouse’s estate could be subject to estate tax, depending on a variety of factors such as the size of your spouse’s total estate and the estate tax exemption available at his or her death.

You can preserve your exemption and reduce or even eliminate estate taxes by placing assets in a credit shelter trust. If properly structured, the trust provides your spouse with income for life — and access to the principal as needed — but the assets aren’t included in his or her estate. Plus, your own exemption shields the trust assets from estate tax.

Take Advantage of a Gifting Strategy

Don’t underestimate the tax-saving power of making gifts. Currently, the annual exclusion is $15,000 per recipient ($30,000 if you split gifts with your spouse).

Annual exclusion gifts can be more effective because, unlike lifetime exemption gifts, they don’t reduce the amount of wealth you can transfer tax-free at death under your estate tax exemption. Gifting, whether under the annual exclusion or lifetime exemption, also removes future appreciation from your taxable estate.

Work with a Pro

In addition to these essential estate planning strategies, there’s much you need to consider when developing or reviewing your overall estate plan. Contact us so you can keep your plan on the right track.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

Keep it all in the family: Transferring your vacation home

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Transferring your vacation home

If your family owns a vacation home, you know what a relaxing refuge it can be. This is especially true these days due to the limited travel options you may have because of COVID-19 pandemic restrictions. However, without a solid plan and ground rules that all family members agree to, conflict and tension may result in a ruined vacation — or worse yet, selling the home.

Determining ownership

From an estate planning standpoint, it’s important for all family members to understand who actually owns the home. Family members sharing the home will more readily accept decisions about its usage or disposition knowing that they come from those holding legal title.

If the home has multiple owners — several siblings, for example — consider the form of ownership carefully. There may be advantages to holding the title to the home in a family limited partnership (FLP) and using FLP interests to allocate ownership interests among family members. You can even design the partnership — or a separate buy-sell agreement — to help keep the home in the family.

Laying down the rules

Typically, disputes between family members arise because of conflicting assumptions about how and when the home may be used, who’s responsible for cleaning and upkeep, and how the property will ultimately be sold or transferred. To avoid these disputes, it’s important to agree on a clear set of rules that cover using the home (when, by whom), and responsibilities for cleaning, maintenance, and repairs.

If you plan to rent out the home as a source of income, it’s critical to establish rules for such activities. The tax implications of renting out a vacation home depend on several factors, including the number of rental days and the amount of personal use during the year.

Planning for the future

What happens if an owner dies, divorces, or decides to sell his or her interest in the home? It depends on who owns the home and how the legal title is held. If the home is owned by a married couple or an individual, the disposition of the home upon death or divorce will be dictated by the relevant estate plan or divorce settlement.

If family members own the home as tenants-in-common, they’re generally free to sell their interests to whomever they choose, to bequeath their interests to their heirs, or even to force a sale of the entire property under certain circumstances. If they hold the property as joint tenants with rights of survivorship, an owner’s interest automatically passes to the surviving owners at death. If the home is held in an FLP, family members have a great deal of flexibility to determine what happens to an owner’s interest in the event of death, divorce, or sale.

Handle with care

A vacation home that has been in your family for generations needs to be handled carefully. You likely want to do everything possible to hold on to it for future generations. We can assist you in developing a plan to help you achieve this.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.